China’s Communist Party newspaper, People’s Daily, noted how the US has an ”uncomfortable” dependence on rare earths, a group of 17 chemical elements used in everything from high-tech consumer electronics to military equipment. In a direct message to Washington, the paper said Beijing was ready to use its supply of rare earths in the increasingly hostile tit-for-tat trade spat, declaring: “Don’t say we didn’t warn you.” The paper wrote: “Will rare earths become a counter weapon for China to hit back against the pressure the United States has put on for no reason at all? The answer is no mystery. Undoubtedly, the US side wants to use the products made by China’s exported rare earths to counter and suppress China’s development.

“The Chinese people will never accept this!”

European shares sank off the back of the warning, with the pan-European STOXX 600 down 1.23 percent at 11.32am BST.

The FTSE 100 was down 1.30 percent at the time of writing, with Germany’s DAX had fallen 1.18 percent.

France’s CAC 40 Index had lost 1.62 percent, while the IBEX 35 Index in Spain lost 1.16 percent.

President Donald Trump has recently ramped up the pressure by raising tariffs on a list of $200billion worth of Chinese imports from 10 percent to 25 percent.

The American leader has also threatened to slap 25 percent tariffs on an additional $300billion worth of Chinese goods should the nations fail to reach an end-game in their trade spat.

China has retaliated to US aggression by raising duties on a revised list of $60billion worth of US products to as high as 25 percent.

Asia stocks and shares were also impacted, with Chinese blue-chip shares ending lower.

However, the Shanghai Composite index rebounded from earlier losses to end 0.16 percent firmer.

The latest signs of trade friction caused an inversion of a part of the US yield curve overnight, normally seen as a leading indicator of an impending recession.

David Madden, market analyst at CMC Markets UK, said: “Even if China doesn’t follow up, the threat (on rare earths) will increase tensions between the two sides and that is likely to drive investors out of stocks and into government bonds.

“The movement in the bond market really spooked investors.”

Chinese production accounted for 80 percent of US imports of rare earth substances between 2014 and 2017.

Europe’s bank index also shed 1.3 percent as Italy’s dispute over its budget with the European Union continued to hurt sentiment.

It was suggested yesterday that the European Commission could be ready to slap Rome with a £3billion (€3.5billion) fine over the nation’s rising debt and deficit levels.

Eurozone officials have claimed the Commission is considering disciplinary action over Italy’s failure to rein in public debt, which breaks official European Union spending rules.

Latest figures and EU forecasts show Italy’s debt swelled from 131.4 percent of gross domestic (GDP) in 2017 to 132.2 percent in 2018.

It is predicted to shoot up further in 2019, where it is expected to reach 133.7 percent this year and 135.2 percent in 2020.

Latest data showed German unemployment rose unexpectedly in May for the first time in nearly two years, in a sign that a slowdown in Europe’s largest economy is spilling over to the labour market.